Sebi extends insider trading rules to MFs: A move toward greater transparency

Starting 1 November, insiders in mutual fund companies, including asset management company (AMC) executives, trustees, and their immediate relatives, will be subject to the same stringent rules that govern trades in listed securities. 

This is the first time mutual funds will be regulated under insider trading rules, ensuring that those with access to sensitive information do not gain an unfair advantage.

Key features of the new regulation

Sebi’s updated regulatory framework for mutual funds, under the Prohibition of Insider Trading (PIT) Regulations, 2015, introduces several important provisions aimed at enhancing transparency.

First, AMCs, trustees, and designated persons must now disclose their mutual fund holdings on a quarterly basis. These disclosures will begin with holdings as of 31 October, and must be submitted by 15 November, 2024. Subsequent disclosures are required within 10 calendar days after each quarter’s close. 

Additionally, any transaction involving mutual fund units exceeding ₹15 lakh in a calendar quarter must be reported to the AMC’s compliance officer within two business days. This applies to trades by designated persons, trustees, and their immediate relatives, focusing on greater scrutiny of large transactions to prevent potential insider trading.

Also, insiders are prohibited from profiting from the sale and purchase of any mutual fund units within a 30-day window. If such trades occur, a detailed explanation must be provided to the compliance officer, who will report the transaction to the board of trustees. These measures reflect Sebi’s commitment to ensuring transparency and protecting investors from potential misuse of non-public information.

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Global influence: Best practices from the US and UK

Sebi’s new regulations have drawn significant influence from global best practices, particularly from the US and the UK, aligning India’s mutual fund regulations with those of leading financial markets.

In the US, the Securities and Exchange Commission (SEC) enforces insider trading regulations through Rule 10b5-1, which allows insiders to set up pre-arranged trading plans when they are not in possession of non-public information. 

This rule ensures insiders can engage in legitimate trades without breaching insider trading regulations. The regulator has introduced a similar mechanism, allowing mutual fund insiders to conduct pre-declared trades, minimising the risk of insider trading. The SEC also requires timely disclosure of insider trades within two business days through Form 4 filings. Sebi’s regulations mirror this requirement, mandating that mutual fund transactions exceeding ₹15 lakh be reported within the same timeframe, thus ensuring transparency and accountability.

In the UK, the Market Abuse Regulation (MAR), enforced by the Financial Conduct Authority (FCA), provides a comprehensive framework to prevent insider trading and market abuse. Sebi’s new regulations align closely with this model, particularly in terms of quarterly disclosures and compliance mechanisms. This alignment helps ensure that insiders do not misuse privileged information for personal gain and that investors have access to timely information.

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Strengthening compliance and monitoring

To enforce the new regulations, Sebi has mandated that all AMCs establish a robust compliance mechanism to detect and prevent insider trading, front-running, and other market abuses. This includes enhanced surveillance systems, stricter internal controls, and regular audits to monitor for potential violations. These systems will help AMCs identify suspicious activities and take corrective actions, ensuring better oversight. The Association of Mutual Funds in India (Amfi), in collaboration with Sebi, will play a key role in developing detailed guidelines for consistent implementation of these standards across the industry. This will help ensure that all AMCs follow a uniform set of compliance practices, reducing regulatory gaps and limiting the opportunities for market abuse.

These regulations mark a significant shift towards greater transparency, enhanced monitoring, and stronger enforcement. 

This development is a welcome step for investors. As the mutual fund industry becomes subject to stricter regulation, it provides a safer and more reliable environment for the investor. 

Simarjeet Singh is an assistant professor at the Great Lakes Institute of Management, Gurgaon. Hardeep Singh Mundi is an assistant professor at IMT, Ghaziabad. Views are personal.